The Indonesian economy: Back to the future after presidential elections?

With the Indonesian presidential race now reduced to two candidates, their economic programs are coming into sharper focus. The prospect is not reassuring.

Both Joko Widodo ('Jokowi') and Prabowo Subianto promise to be more dirigiste and inward looking. Jokowi, in particular, talks in terms of returning to Sukarno's concept of 'Trisakti', where the central economic principle is self-sufficiency ('standing on one's own feet'):

In the economic field Indonesia must free itself from its deep dependence on foreign investment/capital/assistance and technology, and reliance on imports for food and other basic goods. Liberal economic policies which emphasise the market have left Indonesia dependent on foreign investment, while our natural resources have been drained away by multinational companies and their Indonesian compradors...The irony is that, for all its natural wealth, Indonesia still has to import foodstuffs...Food and energy security are two things that can't be bargained about any longer.

This kind of language (check Das Kapital for 'compradors') has been absent from the mainstream Indonesian economic debate for 50 years, and with good reason. These are the policies that were implemented in the first two decades of independence, with abysmal results. Economic growth failed to keep up with population increase and by 1965 the economy was bankrupt.

In one of those unexpected disjunctures that history sometimes throws up, Soeharto — who might have been expected to favour command-and-control — delegated economic policy-making to a group of academic economists (the 'Berkley Mafia' or, more accurately, the 'technocrats'). Under the strong leadership of Professor Widjojo Nitisastro, they implemented sensible mainstream macro-economic policies (balanced budget, low inflation, small external imbalance) and encouraged a market-oriented environment. In the economic watershed of 1967, the economy was opened up to international commerce, with nationalised foreign companies returned to their former owners and new foreign investment welcomed.

Thus began three decades of 7% annual growth which transformed the Indonesian economy and demonstrated that even basket cases could prosper, given competent macro-economic policies. Indonesia could have done better still with a less corrupt and more competent administration, but the absence of such things made it all the more important to rely on the market to determine prices and allocation wherever possible.

These market-based policies, reliant on imported capital and technology to drive exports and facilitate labour-intensive manufacturing, pre-dated the formalisation of the Washington Consensus.They were, in fact, the forerunners which demonstrated its validity. The technocrats were not doctrinal free-market ideologues. State-owned enterprises still dominate the 'commanding heights' and the technocrats were ready to nudge the economy and soften the sharp edges of capitalism. But they had a well founded suspicion of too much state interference.

These market-oriented principles did not go unchallenged. Habibie's aircraft manufacturer and Ibnu Sutowo's Pertamina empire building were diversions from the Washington Consensus precepts. But by and large the technocrats ran policy in the Soeharto era, to Indonesia's huge benefit.

The post-1998 democratic era brought new challenges to good economic policy-making. Business vested interests and self-interested politicians found new opportunities to divert decision-making to their own advantage. Democracy created new imperatives for fundraising. Devolution of responsibilities to the regions diluted policy coherence.

Whenever these departures occurred, the results have been unhappy. When Australia's beef export ban paved the way for monopolistic import quotas, the process was subverted and abused. Foreign mining investors were required to increase local ownership, but finding the domestic capital has been problematic. The ban on exporting unprocessed mineral ores is undermining foreign exchange earnings. Bank ownership rules were tightened, leaving Indonesia with a financial sector lagging behind its regional peers.

Despite these departures, the core planks of globally open and market oriented policies have, until now, remained in place. The economy remains open to foreign investment. Widjojo's technocratic successors still hold most of the key economic portfolios.

Will Jokowi, if elected, turn the clock back and reinstate the failed policies of the 1950s? He comes from a practical business background and has shown himself to be an adept administrator. His vice presidential running mate, Jusuf Kalla, is deeply experienced in both business and politics. The bureaucracy, too, will exert some inertia to prevent policy slipping the wrong way too quickly.

In the meantime, Jokowi may learn a key lesson of politics: good economics sometimes requires pre-election promises to be broken or at least re-interpreted. Perhaps Australia should offer some bipartisan technical assistance on how it's done.